Malta Revamps Corporate Tax System
The Maltese government embarked on a novel project to revamp the corporate tax system in order to maintain a competitive tax regime by mitigating cashflow repercussions arising from the system of tax refunds. The idea is to facilitate tax compliance matters and allow group companies to pay the effective corporate tax, rather than go through the tax refund process. Such new regulations are aimed across the board and are not restricted to a particular business sector.
The current tax-refund system of Malta
At the moment, Malta’s main fiscal benefits revolve on the granting of tax refunds to shareholders of Maltese entities. The extent of such refunds depends on the nature of the business income, and effectively, the corporate tax rate can go down to as low of 5%. One of the conditions for the shareholders to obtain such a tax refund is that the Maltese company needs to pay a 35% corporate tax. Upon approval of the application for the refund, the shareholders would then be given a rebate of up to 6/7th of the tax paid at the level of the Maltese entity, which effectively leaves a 5% tax charge.
While undoubtedly obtaining the lowest corporate tax rate in the EU for trading activities, this system has one major drawback: cashflow. The shareholders need to obtain approval via prescribed forms from the authorities in order to obtain the anticipated refund while at the same time, respecting tax payment (35%) deadlines.
The new regulations
The novel system aims at creating single “fiscal units” comprising of the Maltese holding company (“the principal tax payer”) and its qualifying “transparent subsidiaries”. The main aim of this process is to remove the system of tax refunds and require the principal tax payer to (a) pay the effective tax, i.e. the 5% for trading activities and (b) that the transparent subsidiaries will not be required to submit or pay any corporate tax. The principal tax payer will be the sole entity that will be responsible for the tax obligations of the entire fiscal unit.
To qualify as a transparent subsidiary, the principal tax payer must hold at least 95% or more of any two of the following three rights in the subsidiary: (i) voting rights (ii) right to profits and (iii) right to assets available upon a winding up. In addition, all companies within the fiscal unit must have the same accounting year end and must prepare audited consolidated accounting records on an annual basis.
The creation of the fiscal unit is done on a voluntary basis, and whenever an election to this effect is made, one also requires approval of the minority shareholders of the transparent subsidiary.
Such a system can be applicable with effect from accounting period commencing on or after the 1st January 2019.
Dr. Francesco Sultana
Kinanis Fiduciaries Limited
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